We have a massive crisis in the markets. This is not going to dissipate in the short term. We're a long way from the worst of the credit crunch as yet. The reason is simply stated: asset prices are still falling rapidly. Whilst they do banks and other financial institutions will continue to see their capital base disappear and their solvency will remain in doubt.
But let's ask why this has happened. There are many complex explanations. There is one simpler one. Central bankers were given one task by government, to keep income inflation down. But they were allowed to let asset inflation run riot. The reason is simple: low income inflation means that the value of bank loans is maintained and they are repaid out of real earnings, meaning real wealth is transferred to the banks. That was invested in a short supply of 'assets', most of which relate to land at the end of the day (such is the shortage of things of real value in the world). Land prices rose out of all proportion to the benefit that most could supply.
Now land prices are crashing. There is asset deflation of enormous degree. But we're still trying to constrain income inflation with high interest rates. That's absurd: people can't repay the capital on their loans right now, so why not at the very least give them a chancre to pay the income stream due on them to give some chance of them being considered performing debt? Any interest rate above 2% in the UK right now is contributing to economic meltdown. Indeed even that may be too high.
And we must cut that interets rate to allow another vital economic phenomena occur: we need inflation, and we need it very badly right now. Only income inflation (or reduction in the value of money rather than assets) can restore any real equilibrium to our markets, wipe out the caustic loans (which inflation will erode away) and leave a chance of a new order to be created in what will, in effect, be a new and revalued currency.
The alternative is deflation of income as well as asset prices, increased economic mayhem, and let's be candid, real risk of fascism which tends to follow these events.
I'll take a good dose of inflation instead of that any day.
So please, cut interest rates now. To 2%. Or less. It's vital to our well being that this happens, now. And if Mervyn King won't do it, sack him. It's a small price to pay.
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Lower interest rates are the last thing we need. It was low interest rates that helped to create the asset bubble to which you refer. Interest rates were too low for too long. The villain of the peace in all this is Alan Greenspan, who slashed interest rates and flooded the markets with liquidity. Now he’s retired he goes round the world lecturing everyone how central bankers are going wrong when it was his policies which caused this chaos.
Peter
I agree: rates were too low and they helped induce the crisis in asset values, especially in the US
But that was then, this is now, and in the UK our rates are far too high
Look at Japan 1991 where they kept the rates far too high for too long and induced recession
You can’t apply lessons of one situation and presume they apply to another
We need low rates now, and until the tide turns. This is pure Keynes, and he was right on this
Richard
Interest rates were too low for the land market – because it is dysfunctional. Interest rates need to be low to encourage REAL investment. You need to control the land market. This is easy. The rest is far more difficult.